Warner Bros. needs a boost this fall

Spate of flops have hurt it and sister company New Line

By

RussBritt

JonFriedman

HOLLYWOOD (CBS.MW) -- It's not scheduled to come out for 3 1/2 months, but the billboards for "Harry Potter and the Sorcerer's Stone" already dot major boulevards here. It's a sign that much is expected -- and needed -- from the upcoming film.

AOL Time Warner has a lot riding on "Harry Potter" as well as the upcoming "Lord of the Rings" series, due out in December. The films are expected to be holiday-season blockbusters, and they had better be if they're going to live up to Wall Street's expectations.

"With a major film push for the balance of the year (12 films to be released before year end), Warner Bros. should be set for a strong finish," Salomon Smith Barney analyst Jill Krutick said in a note this week. "Warner Bros.' second half success will be a key factor in AOL Time Warner hitting '01 revenue and (cash-flow) targets."

Warner Bros. and New Line Cinema, the film divisions of the world's largest media and entertainment company, need good news to make up for some high-profile disappointments in the last year.

In the past nine months, three of AOL Time Warner's
AOL
most ballyhooed movies were riddled with problems.

Late last year, New Line's "Little Nicky," starring Adam Sandler, flopped at the box office. So did Warner's "Pay It Forward," despite having the star power of Oscar winners Kevin Spacey and Helen Hunt. And this summer, Warner's "A.I.: Artificial Intelligence" started out strong but faded quickly at the box office.

Warner also failed to click with such recent releases as "Red Planet," "Proof of Life," "Get Carter," "3,000 Miles to Graceland" and "Driven."

And not only did "Little Nicky" hurt New Line's bottom line, the critically acclaimed "Thirteen Days" also fell short. "Town & Country," was perhaps the biggest disappointment of all. The Warren Beatty-Diane Keaton film cost $90 million to make and brought in only $6.7 million at the U.S. box office, hampered by bad publicity surrounding its numerous production delays.

New Line hopes it has addressed these issues by revamping its staff. Production president Michael De Luca has been replaced. It started righting the ship with last weekend's release of "Rush Hour 2," which opened at No. 1 with $66.8 million.

"I think there are a number of very promising titles on the slate," New Line spokesman Steve Elzer said.

Changes in marketing

According to analysts and industry sources, Warner has suffered because its marketing department has been overburdened with an unusually large slate of films this year.

As one source familiar with the company put it, the Warner marketing department is reminiscent of a memorable "I Love Lucy" episode. In it, Lucy is so overwhelmed wrapping chocolates at a candy factory that she ends up stuffing them in her mouth and blouse.

"The marketing (at Warner) has really changed and not for the better," said Anita Busch, a film industry journalist and former editor of the trade publication Hollywood Reporter. "They used to spend what it took to open the pictures. There has been a market turn since the new regime came in and the cutbacks at AOL Time Warner started."

Warner Bros. officials contend they have spent what it takes to open films. They point out the last three Warner movies, "Swordfish," "Cats & Dogs" and "A.I.: Artificial Intelligence," premiered in the top spot at the box office.

They also say that the company's marketing department is not troubled.

"Warner Bros. Pictures is on track to have one of its best years ever," said Barbara Brogliatti, company spokeswoman. "The best indicator of (the marketing department's) abilities is the fact that the last three films they marketed were No. 1 at the box office performing either right on tracking or better."

First test is the box office

For its part, AOL Time Warner reported record second-quarter revenue and income for its film division. In a July 18 conference call with analysts, AOL Time Warner executives praised the performance of the film division.

The company noted in a press release that its filmed entertainment revenue grew 5 percent to $1.9 billion, "reflecting a stronger slate of movies and an improved home video market driven by DVD sales."

But it is unclear how much Warner's movies contributed to that growth. The company said in its quarterly statement that it saw a 65 percent increase in home video sales. Warner officials say they won't break out how much growth was attributable to box office.

A closer look at Warner's figures show some troubling signs. While "A.I." and "Swordfish" opened at No. 1, they faded quickly -- not good signs for films that cost $90 million and $80 million to make, respectively.

More importantly, both Warner and New Line have ranked well down on the list of the nine major studios in getting bang for the buck.

Budget figures for the two companies' films show that New Line has been worst, and Warner third worst, in money spent vs. U.S. box office for 2001 films through July 15. Per film, Warner spent an average $45.8 million and took in $36.3 million in U.S. box office. New Line spent $43.2 million and got back $24.3 million.

For 2000, New Line was second worst, spending $32.7 million per film and taking in $29.7 million. Warner was fourth from the bottom, spending $38.5 million per film and taking in $41 million. Budget figures don't include marketing costs.

U.S. box office is not the final word for determining a film's profitability. That can be a tricky issue. Augmenting it are foreign box office, home video and TV rights. Cutting into profitability is the theater owner's cut, which often is 50 percent. And there are back-end payoffs to actors, directors and other talent.

But the U.S. box office is a key market. It's relied upon to generate interest in the product and indicates how well the product might be received by the public. A poor performing slate of films may go deep into their market lives before they turn a profit, with some never getting there.

Warner faces less exposure on 10 of the 28 films it's releasing this year because it only markets and distributes the pictures. Smaller production companies bear the brunt of making the movies and pay Warner a marketing and distribution fee.

Many of Warner's troubled films such as "3,000 Miles to Graceland," "Driven" and one of last year's biggest flops, "Battlefield Earth," were distributed only by Warner. Warner says it actually made money on "Battlefield Earth."

But former employees and partners of the studio say this extra burden is putting too much stress on a marketing department that already is taxed by recent staff turnover and low morale.

One source involved in "A.I." said Warner is so overtaxed that it can't give the attention needed to devising complete strategies for rolling out all its films. The source questioned whether "A.I." was an appropriate summer release.

The film cost $90 million to make and has returned $77 million at the U.S. box office thus far. It is doing well in Japan, bringing in more than $55 million, but hasn't lived up to expectations here.

"They didn't really knock the ball over the fence there," said John Corcoran, AOL Time Warner analyst for CIBC WorldMarkets. "Their hit-driven businesses are not doing well."

Brogliatti said each film is given adequate attention.

"We work in teams in the marketing department, as well as use outside agencies if necessary," she said. "The team working on 'Harry Potter' is not the same team that is working on 'Ocean's 11' or 'Affair of the Necklace' (two releases due later this year). We pride ourselves on treating every title, no matter who produces it, like it is our only title."

AOL's $40 billion goal

AOL Time Warner Chief Executive Gerald Levin has said several times that the company's film products could be one of the biggest beneficiaries of the landmark $108 billion merger last January between America Online and Time Warner.

In meetings with reporters, Levin trumpeted the positive effect from America Online's relentless promotions for Warner's 2000 blockbuster, "The Perfect Storm." Levin suggested that the company's success with "The Perfect Storm," which had a box office of $182 million, served as a metaphor for the impact of the Internet service on the Time Warner businesses.

People familiar with Hollywood counter Levin's optimism by saying that the pressure on the parent company to meet its oft-stated goal of generating 2001 revenue of $40 billion may be forcing its film division to change the way it markets movies.

Analysts said AOL Time Warner had disappointing revenue in the second quarter, casting some doubt on whether it can reach its $40 billion projection.

"There has been a big merger between AOL and Time Warner, a change in management at Warner and a general period of transition," said Busch.

The film division is a crucial component of AOL Time Warner's overall strategy of cross marketing.

"The movie division is not insignificant to AOL Time Warner's plans to be an integrated media powerhouse," said Michael Holland, president of New York money manager Holland & Co. "But the film division has been a disappointment because it's not working right now."

That perception could change in a hurry later this year.

A lot is riding on 'Harry Potter'

The key to the film division's performance will be "Harry Potter."

"They'll have a great back half of the year," said Jessica Reif Cohen, a Merrill Lynch analyst. "'Harry Potter' is going to be huge. They're marketing it across the board."

"Warner has 'Harry Potter,' 'Ocean's 11' and 'The Majestic' coming up," Busch pointed out, mentioning three movies that are said in Hollywood to have to have a positive word-of-mouth "buzz" in movie circles.

New Line is counting heavily on "Rush Hour 2" and "Lord of the Rings" to rebound. "Lord of the Rings" is a huge gamble, as New Line spent $270 million to make three installments of the J.R.R. Tolkien fantasy series before seeing how the first one, "Fellowship of the Ring," will do this December. It debuts the same week as Warner's "Majestic."

"Harry Potter," riding the coattails of the hugely popular book series of the same name, is expected to be a big hit, especially with families. One source from a partner of Warner's said, however, that so much of the studio's publicity department is devoted to promoting "Harry Potter" that it's taking away from other films.

"Oceans 11," a remake of the popular Frank Sinatra movie, features popular stars George Clooney and Julia Roberts. "Majestic" features a rare dramatic turn by Jim Carrey, whose last movie, "The Grinch Who Stole Christmas" generated the biggest box office of the past 12 months.

"The fall looks really tremendous," Busch said. Then she reflected and said: "I don't know how they can mess up 'Harry Potter.'"

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